# Virco MFG Corporation: Form 10-Q for the period ended Oct 31, 2018

- Company: [Virco MFG Corporation](/companies/virc.md) (CIK 751365)
- Form: 10-Q
- Filed: 2018-12-14
- Accepted by EDGAR: Dec 14, 2018, 16:52 ET
- Period: 2018-10-31
- Accession: 0001628280-18-015124
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/751365/000162828018015124/virc-20181031x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/751365/000162828018015124/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-10-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Gross profit | 3 months, 2018-08-01 to 2018-10-31 | $26.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-02-01 to 2018-10-31 | $61.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-08-01 to 2018-10-31 | $21.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-02-01 to 2018-10-31 | $52.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-08-01 to 2018-10-31 | $4.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-02-01 to 2018-10-31 | $8.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-08-01 to 2018-10-31 | $630.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-02-01 to 2018-10-31 | $1.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-08-01 to 2018-10-31 | $1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-02-01 to 2018-10-31 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-08-01 to 2018-10-31 | $2.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-02-01 to 2018-10-31 | $4.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-08-01 to 2018-10-31 | $0.19 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-02-01 to 2018-10-31 | $0.31 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-08-01 to 2018-10-31 | $0.19 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-02-01 to 2018-10-31 | $0.31 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-08-01 to 2018-10-31 | 15,582,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-02-01 to 2018-10-31 | 15,491,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-02-01 to 2018-10-31 | $2.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-02-01 to 2018-10-31 | $3.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2018-02-01 to 2018-10-31 | $697.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2018-02-01 to 2018-10-31 | $265.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-10-31 | $2.5m | us-gaap:Cash |
| Current assets | at 2018-10-31 | $71.5m | us-gaap:AssetsCurrent |
| Total assets | at 2018-10-31 | $130.5m | us-gaap:Assets |
| Current liabilities | at 2018-10-31 | $34.4m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2018-10-31 | $14.0m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-10-31 | $6.2m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-10-31 | $63.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 9,642 characters.

### Results of Operations

### Three Months Ended October 31, 2018

For the three months ended October 31, 2018, the Company earned pre-tax income of $4,035,000 on net sales of $76,809,000 compared to a pre-tax income of $4,228,000 on net sales of $68,794,000 in the prior year.

Net sales for the three months ended October 31, 2018 increased by $8,015,000 or 11.7%. This increase was primarily due to an increase in price combined with a small increase in volume. As discussed in the Company’s Form 10K, there are two significant funding sources that drive the Company’s sales; bond-funded business and business funded from the operating budgets of the schools. The Company experienced robust growth in orders during the first six months, which is more heavily influenced by bond-funded projects. Orders in the third quarter are typically more dependent on the operating budgets of the schools. Orders for the third quarter declined by approximately $6.5 million. Ending backlog at October 31, 2018 was $16.2 million compared to $16.9 million at the same date last year.

The third quarter results reflected continued seasonality of the Company’s business, with revenue moving from the second to the third quarters due to an increase in orders received in July that were delivered in the third quarter. Gross margin as a percentage of net sales decreased to 34.4% for the three months ended October 31, 2018 compared to 35.6% in the same period last year. The deterioration of the margin in the third quarter is attributable to several components. The Company raised selling prices at the beginning of this year. The increase was targeted to cover cost increases incurred during 2017 and a moderate increase in 2018. The Company did not raise prices adequately to compensate for all the cost increases subsequently incurred during the 2018 fiscal year. The primary change in costs related to raw materials (steel, plastic, and imported components) and employee compensation.

Selling, general and administrative expenses for the three months ended October 31, 2018 increased by $1,967,000 compared to the same period last year but was leveraged to 28.3% of net sales compared to 28.8% of net sales in the same period last year. The increase in selling, general and administrative expenses was attributable to variable freight and selling expenses. Interest expense increased due to increased levels of borrowing and higher interest rates.

### Nine Months Ended October 31, 2018

For the nine months ended October 31, 2018, the Company earned a pre-tax income of $6,594,000 on net sales of $174,180,000 compared to a pre-tax income of $8,545,000 on net sales of $164,665,000 in the same period last year. Net sales for the nine months ended October 31, 2018 increased by $9,515,000 compared to the same period last year. This increase was the result of growth in price. The Company began the year with a backlog of orders that was approximately $3.6 million greater than the prior year. Order rates for the first nine months increased by approximately 3.7% compared to the prior year.

Gross margin as a percentage of net sales declined to 35.2% for the nine months ended October 31, 2018 compared to 36.2% in the same period last year. There are three primary reasons for the decrease. First, for the first nine months, most of the increase in sales was from project type business, which included larger more complex orders. Bidding on these projects can be intense, and typically include a larger portion of products sourced from third-party manufacturing partners. Margins on product from third-party manufacturing partners typically have a lower margin than product manufactured by Virco. Second, was the relationship between the selling price increases to the cost increases incurred. The Company raised selling prices at the beginning of this year, but increased prices modestly in effort to increase sales volume. The Company did not raise prices adequately to compensate for all the cost increases subsequently incurred during the year. Third, production levels in our factories increased by approximately 1%, but increased compensation costs combined with more complex orders to fill, adversely impacted manufacturing efficiencies.

Selling, general and administrative expenses for the nine months ended October 31, 2018 increased by approximately $3,000,000 compared to the same period last year and remained relatively consistent at 30.3% of net sales compared to 30.2% of net sales in the same period last year. The increase in selling, general and administrative expenses was attributable to variable freight, variable selling and variable compensation expenses driven by the increased sales and by the increase in project related business. Interest expense increased due to increased levels of borrowing and higher rates.

Income tax expense for the third quarter and nine months ended October 31, 2018 is not comparable to the prior year, primarily due to the reduction in federal income tax rates for 2018 as a result of the Tax Cut and Jobs Act passed in December 2017.

### Liquidity and Capital Resources

As discussed in the Company's Form 10-K, approximately 50% of the Company's annual sales volume is shipped in June through August. The Company traditionally builds large quantities of inventory during the first and second quarters of each fiscal year in anticipation of seasonally high summer shipments. In addition, the Company finances a large balance of accounts receivable during the peak season.

For the first nine months, the Company increased inventory by approximately $613,000 at October 31, 2018 compared to January 31, 2018. This compares to an increase of $688,000 during the same period last year. Inventory at October 31, 2018 was $6,293,000 more than October 31, 2017 of the prior year. Approximately 50% of this increase is valuation and approximately 50% is quantity. Accounts receivable at October 31, 2018 compared to January 31, 2018 increased by $12,896,000 compared to $11,205,000 during the same period in the prior year. The increase in inventory and receivables was financed in part by vendor credit, which naturally increases with increased third quarter business activity, and through the Company's credit facility with PNC Bank.

Interest expense for the nine months ended October 31, 2018 is $618,000 higher than the same period last year due to increased borrowings and increased rates. Borrowing under the Company's revolving line of credit with PNC Bank at October 31, 2018 is greater than October 31, 2017 due to increased inventory and accounts receivable.

Capital spending for the nine months ended October 31, 2018 was $3,319,000 compared to $12,521,000 for the same period last year. The prior year capital expenditures included the purchase of a manufacturing facility in Conway, AR. The Company had previously occupied the building under a 10-year lease. Capital expenditures are being financed through the Company's credit facility with PNC Bank and operating cash flow.

The Company utilizes borrowings from the arrangement with PNC to fund seasonal working capital needs and certain capital expenditures. Compared to prior year net cash provided by financing activities decreased to $2,444,000 from $9,237,000, primarily due to the large decrease in capital expenditures in the current year.

The Company believes that cash flows from operations, together with the Company's unused borrowing capacity with PNC Bank will be sufficient to fund the Company's debt service requirements, capital expenditures, cash dividends, and working capital needs for the next twelve months.

### Off Balance Sheet Arrangements

None.

### Critical Accounting Policies and Estimates

The Company's critical accounting policies are outlined in its Annual Report on Form 10-K for the fiscal year ended January 31, 2018. There have been no significant changes in the quarter ended October 31, 2018.

### Forward-Looking Statements

From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2018, the Company or its representatives have made and may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission ("SEC"). The words or phrases “anticipates,” “expects,” “will continue,” “believes,” “estimates,” “projects,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company's forward-looking statements are subject to certain risks and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, availability of funding for educational institutions, availability and cost of materials, especially steel, availability and cost of labor, demand for the Company's products, competitive conditions affecting selling prices and margins, capital costs and general economic conditions. Such risks and uncertainties are discussed in more detail in the Company's Form 10-K for the fiscal year ended January 31, 2018 under the caption "Risk Factors".

The Company's forward-looking statements represent its judgment only on the dates such statements were made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances.

## Market risk

As filed, 686 characters.

The Company is subject to interest rate risk related to its seasonal borrowings used to finance additional inventory and receivables. Rising interest rates may adversely affect the Company's results of operations and cash flows related to its variable-rate bank borrowings under its credit line with PNC. Accordingly, a 100-basis point upward fluctuation in PNC's base rate would have caused the Company to incur additional interest charges of approximately $85,000 and $261,000 for the three months and nine months ended October 31, 2018, respectively. The Company would have benefited from a similar interest savings if the base rate were to have fluctuated downward by a like amount.

## Controls and procedures

As filed, 1,849 characters.

### Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Principal Executive Officer along with its Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) as of October 31, 2018. Based upon the foregoing, the Company's Principal Executive Officer along with the Company's Principal Financial Officer concluded that the Company's disclosure controls and procedures as of such date were effective to ensure that the information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Company management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Company management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

### Changes in Internal Control Over Financial Reporting

There have been no changes in the Company's internal control over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

## Risk factors

As filed, 431 characters.

You should carefully consider and evaluate the information in this Quarterly Report and the risk factors set forth under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2018 (the “Form 10-K”), which was filed with the SEC on April 27, 2018. The risk factors associated with our business have not materially changed compared to the risk factors disclosed in the Form 10-K.

Filed Dec 14, 2018.
Source: SEC EDGAR, the filing index for accession 0001628280-18-015124. Last ingested by Listed: Oct 24, 2026, 14:54 ET. No prices; not investment advice.